Archives

Meta

Categories

Cabcharge charging a rort

Taxis are an important part of our urban transport system. The recent inquiries in NSW and Victoria show they are among the least efficiently managed industries in our community. The issue of reforming them is difficult because of the evident need to compensate those who have paid huge amounts for licences with any deregulation. But one reform is self-evident and should go through immediately. I think no-one but the shareholders of a single firm could argue with this one.

Cabcharge has substantial monopoly power in the market providing electronic/non-monetary payments for taxis. It controls 97% of the market and levies a 10% fee on fares for providing this service – that’s true whether you use a taxi voucher or a credit card. The average fee for similar services in the rest of the community is 2% and the cost of providing the service about 1% of revenues. Cabcharge’s move into operating taxi networks intensifies its monopoly position.

The Reserve Bank should legislate to limit such charges to something less than 5% as is now currently proposed. The fee as it stands unnecessarily damages the taxi industry and taxi driver incomes as well as commuters because, by substantially increasing the cost of taxi travel, it reduces the quantity demanded of taxi services.

The stock market seems to be forcecasting that this reform will go through. Yesterday’s Cabcharge share price was $3-93 down from its peak of $6-57 this year. (2581)

Actually Cabcharge doesn’t have a monopoly on payments. There are plenty of other operators such as GM Cabs (Sydney based) that offer mobile EFTPOS services – next time you take a taxi and use a mastercard or visa notice what machine the driver uses (drivers usually get a rebate from mobile EFTPOS providers to encourage use)

Where the company’s power might be considered more damaging is the issue of compulsory network membership, as credit card companies now have other operators they can negotiate with to lower fees following the RBA’s decision on surcharges (unlike the Cabcharge dispute with Visa during the 2000 Olympics).

I would also nominate the cost/value of taxi plates as being more of a problem. Their total implied value is several $bn (hundreds of thousands of dollars value per plate multiplied by the number of taxis), which in turn means a huge amount of money being is being sucked out of the industry to generate the reqired ROA for such values to be achieved. Money that comes from taxi fees that could be better used to remunerate drivers and maintain vehicles.

A business must be highly efficient if it maintains a 97% market share. What are the barriers to entry? What costs must the new entrant pay that the incumbent did not?

A cab charge is nothing more than a limited purposes credit card. MasterCard and Visa card networks are so easy to challenge that a small firm can take significant business from them with a credit card with a much smaller network.

Remember Ronald Coase’s famous observation:

“One important result of this preoccupation with the monopoly problem is that if an economist finds something–a business practice of one sort or other–that he does not understand, he looks for a monopoly explanation.

And as in this field we are very ignorant, the number of ununderstandable practices tends to be very large, and the reliance on a monopoly explanation, frequent.”

There is also a charge card for truckies etc that allows them to pay at petrol stations for all services sold or just for fuel and oil. How does that network supplier survive in competition with MasterCard and Visa Card?

Niche credit card and charge card networks in the payment industry are common.

I use a preloaded cash card for my bus trips, which I can also use in taxis and at 7/11 type stores and cafes and like places with many small value transactions. Is this small new entrant a monopoly network too?

[...] to be reformed and that most of the proposals in the Fels review were sound – the proposal to cut the ridiculous 10% charge on credit card payments by Cabcharge is an obvious example . My single major concern was with the proposal to effectively peg license values at the [...]